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Sunday, April 30, 2017

Building
wealth – it's a topic that sparks heated debate, promotes quirky "get rich
quick" schemes and drives people to pursue transactions they might
otherwise never consider. "Three Simple Steps To Building Wealth" may
seem like a misleading title, but it isn't. While these steps are simple to
understand, they're not easy to follow.

The
Steps

Basically,
building wealth boils down to this: to accumulate wealth over time, you need to
do three things:

1.You need to make it. This means
that before you can begin to save or invest, you need to have a long-term
source of income that's sufficient to have some left over after you've covered
your necessities.

2.You need to save it. Once you have
an income that's enough to cover your basics, you need to develop a proactive
savings plan.

3.You need to invest it. Once you've set
aside a monthly savings goal, you need to invest it prudently.

Step
1: Making Enough Money

This
step may seem elementary, but for those who are just starting out, or are in
transition, this is the most fundamental step. Most of us have seen tables
showing that a small amount regularly saved and compounded over time can
eventually add up to substantial wealth. But those tables never cover the other
sides of the story – that is, are you making enough to save in the first place?
And are you good enough at what you do and do you enjoy it enough that you can
do it for 40 or 50 years in order to save that money?
To begin, there are two types of income – earned and passive. Earned income
comes from what you "do for a living," while passive income is
derived from investments. This section deals with earned income.Those
beginning their careers or in the midst of a career change can think about the
following four considerations to decide how to derive their "earned
income":

1.Consider
what you enjoy. You will perform better and be more likely to succeed
financially doing something you enjoy.

2.Consider
what you're good at. Look at what you do well and how you can use those talents
to earn a living.

3.Consider
what will pay well. Look at careers using what you enjoy and do well that will
meet your financial expectations.

4.Consider
how to get there (educational requirements, etc.). Determine the education
requirements, if any, needed to pursue your options.

Taking
these considerations into account will put you on the right path. The key is to
be open-minded and proactive. You should also evaluate your income situation
annually.

Step
2: Saving Enough of It

You
make enough money, you live pretty well, but you're not saving enough. What's
wrong? There's only one reason why this occurs: your wants exceed your budget.
To develop a budget or to get your existing budget on track, try these steps:

1.Track
your spending for at least a month. You may want to use a financial software
package to help you do this. If not, your checkbook is the best place to start.
Either way, make sure you categorize your expenditures. Sometimes just being
aware of how much you are spending will help you control your spending habits.

2.Trim
the fat. Break down your wants and needs. The need for food, shelter and
clothing are obvious, but you also need to address less obvious needs. For
instance, you may realize you're eating lunch at a restaurant every day.
Bringing your own lunch to work two or more days a week will help you save
money.

3.Adjust
according to your changing needs. As you go along, you probably will find that
you've over- or under-budgeted a particular item and need to adjust your budget
accordingly.

4.Build
your cushion – you never really know what's around the corner. You should aim
to save around three to six months' worth of living expenses. This prepares you
for financial setbacks, such as job loss or health problems. If saving this
cushion seems daunting, start small.

5.Get
matched! Contribute to your employer's and try to get the maximum your employer is
matching. Some employers match 100% of the participant's contribution, and this
can be a big incentive to add even a few dollars each paycheck.

The
most important step is to distinguish between what you really need and what you
merely want. Finding simple ways to save a few extra bucks here and there could
include: programming your thermostat to turn itself down when you're not at
home; using plain unleaded gasoline instead of premium; keeping your tires
fully inflated; buying furniture from a quality thrift shop; and learning how
to cook. This doesn't mean that you have to be thrifty all the time: if you're
meeting savings goals, you should be willing to reward yourself and splurge (an
appropriate amount) once in a while! You'll feel better and be motivated to
make more money.

Step
3: Investing It Appropriately

You're
making enough money and you're saving enough, but you're putting it all in
conservative investments. That's fine, right? Wrong! If you want to build a
sizable portfolio, you have to take on risk, which means you'll have to invest
in equities. So how do you determine what's the right exposure for you?Begin
with an assessment of your situation. The CFA Institute advises investors to
build an Investment Policy Statement. To begin, determine your return and risk
objectives. Quantify all of the elements affecting your financial life
including: household income; your time horizon; tax considerations; cash
flow/liquidity needs; and any other factors that are unique to you.Next,
determine the appropriate asset allocation for you. Most likely you will need
to meet with a financial advisor unless you know enough to do this on your own.
This allocation will be based on the Investment Policy Statement you have
devised. Your allocation will most likely include a mixture of cash, fixed
income, equities and alternative investments.Risk-averse
investors should keep in mind that portfolios need at least some equity
exposure to protect against inflation. Also, younger investors can afford to
allocate more of their portfolios to equities than older investors, as they
have time on their side. Finally,
diversify. Invest your equity and fixed income exposures over a range of
classes and styles. Do not try to time the market. When one style (e.g., large
cap growth) is underperforming the S&P 500, it is quite possible that
another is outperforming. Diversification takes the timing element out of the
game. A qualified investment advisor can help you develop a prudent
diversification strategy.